There’s always a bit of anxiety in the air when financial advisors study for the rigorous Certified Financial Planner exam, but the version of the test that’s coming next week may be accompanied by more than the usual share of worrying.
The exam set for March 16-17 will feature new questions driven by a different philosophy by the CFP Board of Standards. The prospect of a new exam rattled so many people that the record turnout at last November’s exam—4,064 signed up—was at least partly the result of applicants who wished to avoid this month’s test, Director of Examinations Steven Barkley says. (Another reason was applicants seeking to take the test before Jan. 1, when new rules requiring additional classroom prerequisites to qualify for the exam take effect. Incidentally, November’s test had the second-best pass rate in the past five years—60.7 percent passed.
The CFP board in January sent around an e-mail to potential test-takers seeking to allay some of the concern about what they called “myths” surrounding the new exam. It would not be harder than earlier exams, but comparable in difficulty, the board said. It would be in the same format—285 multiple-choice questions over two days, with short scenarios and longer case studies. And it would not require more memorization, but rather focus on using knowledge to solve problems that are related to the work a financial advisor actually does.
“It’s really a move from recognition and rote memorization to requiring some higher cognitive functioning,” Barkley says. “Our goal is to make the exam more representative of what practitioners do.”
Some of those types of questions may not surprise people who have taken the test before. CFP field-tested them in earlier exams. (Check out two sample questions further below that are illustrative of what the board wants to accomplish.) The board announced more than a year ago that it planned to rework some of the questions as a result of a review it conducts every five years of the exam process. Barkley said the method for determining the cut score for the pass/fail rate would be similar to what’s been done before.
Some advisors who are planning to take next week’s exam welcomed the new approach on questions. Hunter Brown, who works with clients and does marketing for an advisor team at Moneta Group, is taking the test for the second time. He’s focusing more on case studies in his review this time around. The previous exam required “more technical regurgitation,” he says, and the new exam is “a positive step.”
Ryan Whiteman, a financial advisor at Whitehurst Financial Group of Raymond James & Associates in Coral Gables, Fla., says that working with clients is seldom something that a Series 7 license exam can prepare you for. The new CFP approach addresses this, he believes.
“Many times (clients) don’t necessarily know what they want, and they present you with all this information and it’s up to you to make something of it,” says Whiteman, 25, who has his Series 7, Series 66, and life/health/variable annuities licenses, and is taking the CFP for the first time next week.
Check out the fact set below and then try the examples of the new CFP questions:
Five years ago John and Barbara, who are in their mid 50s and have one adult child out of college, experienced a sharp increase in income (10 times) within a two-year period. Their lifestyle and the complexity of their financial situation increased respectively. Their income statement's bottom line increased and their assets/liabilities expanded as well (third home, credit card debt, etc.). They had no retirement savings at age 50; after consulting their accountant, they implemented a 401(k) and defined benefit plan with the dual purpose of deferring taxes and saving for retirement. John and Barbara’s increase in income was based upon Barbara’s success at a new business venture. John is the business manager of the venture. Their financial assumptions were based on unrealistic sales assumptions and they were not prepared for the recent recession or their parent company’s subsequent reorganization. Since the reorganization their income fell by 65%. As a result, they had a mortgage on a second home in Las Vegas (purchased at the peak of the real estate market), less than one month of emergency reserves, and six-figure credit card debt. They were unable to fund their pension obligation (to themselves) and closed the plan, while also taking the maximum loans from their 401(k)s to pay off their credit cards.
John and Barbara's objectives include: immediately establishing an emergency fund, determining how much income will be needed from investments to supplement Social Security and work in retirement, and preparing an exit strategy for real estate holdings.
Item #1
A CFP® professional observes that John and Barbara are constantly living a few steps ahead of their means. They assure the CFP® professional that they will reign in their spending, but their credit card balances continue to rise. All of the following are acceptable strategies EXCEPT:
- A) Terminate the relationship with the clients
- B) Document their inability to take advice to guard the practice from risk
- C) Counsel the clients on credit card balance transfer strategies
- D) Ask their son to talk to his parents about their spending habits and accumulated debt
Correct answer: D
Key Rationale
The CFPprofessional cannot discuss sensitive information with another family member unless he/she has prior permission, can fire the client, document lack of follow thru, and counsel the client, so D is the most acceptable answer.
Item #1 is an example of the type of situation a CFP® professional has likely encountered in post recession America. The clients (John and Barbara) are living above their means. This question requires the candidate to synthesize client spending, ethical principles, practice standards and communication skills to identify which answer is simply not acceptable.
Answer option A is certainly acceptable. The planner could terminate the relationship with a client. In the 100-1 series Practice Standard, a CFP® professional must define client and adviser responsibilities. By continuing to live above their means, the clients may be presenting a situation where the planner and client cannot meet obligations to one another (such as funding goals).
Options B and C are both possible outcomes a financial planner should take if he/she is going to continue a relationship with the client. While option B is not an optimal solution to the clients’ immediate problems; the process of documentation may lead to further discussion. Option B requires an understanding of the 400 series Practice Standards; overspending must be documented as a limitation when presenting the client with primary and alternative recommendations. If the clients will continue to overspend they will require flexibility in savings products. Option C holds to the ethical principles of competence and objectivity; the CFP® professional would need to address the client goal of managing debt by developing a debt management plan.
Option D, the correct answer choice (known as the Key) violates the ethical principle of confidence. A CFP® professional may not disclose client information (in this case spending habits, debt and behavior) directly to an adult child without legal compulsion or the clients’ direct involvement.
Item #2
Barbara feels that the economy is on the verge of a turn-around. She has an opportunity to expand her business, and, if she is right about the economy, this will substantially grow revenue. She will need an additional $50,000 for this expansion. What is the most suitable recommendation for Barbara and John as it pertains to business expansion?
- A) Borrow $50,000 from a home equity line of credit
- B) Take a $50,000 loan from their 401(k)s
- C) Bring in a qualified partner who is able to commit the capital
- D) Use part of the cash reserve to fund a portion of the expansion
Correct answer: C
Key Rationale
They cannot afford to increase the debt load, 401(k) loan is too risky if unable to repay, and cash reserves should not be drawn down for a non-emergency. C is the most acceptable answer.
Item #2 requires the candidate to exhibit an understanding of case facts. The client narrative expresses that the clients are indebted with a six-digit credit card debt. The question asks the candidate to identify the most suitable recommendation. While all recommendations would provide Barbara with $50,000, the candidate must synthesize the risk of each option before making a decision. The client narrative provides the candidate with Barbara and John’s prior assumptions (like infinite growth) which may provide the basis for professional skepticism.
Answer options A and B bring additional debt exposure to the client. Additional debt exposure for a client heavily indebted will jeopardize financial safety and wellness, and if Barbara’s hunch is wrong, will hasten negative financial consequences.
Option D takes away from their remaining cash reserves - which have previously been reduced to one month of living expenses. While living expense ranges vary client to client; reducing one month by $50,000 is less suitable than the correct answer option, C. Bringing an outside partner into the venture may limit future income in the event Barbara’s hunch is correct but does not subject the clients to additional loss exposure. Of the solutions presented, C is the most suitable.